Small Bumps, No Potholes
You have to think there are some very happy LPs out there.
Despite calls for the end of the most recent bull cycle for the private capital markets, performance continues to chug along, despite some bumps in the exit road. Returns across private equity, venture and real estate remained strong through the third-quarter of 2017 according to the most recent figures from Cambridge Associates.
|YTD||3 yrs||5 yrs|
|U.S. Private Equity Index||11.2%||10.2%||13.7%|
|U.S. Venture Capital Index||8.1%||10.8%||14.8%|
|U.S. Real Estate Index||10.1%||10.9%||12.1%|
|Ex-US Developed Markets PE and VC Index||21.0%||12.0%||12.5%|
|Emerging Markets PE and VC Index||12.2%||10.5%||11.8%|
|S&P 500||14.2 %||10.8%||14.2%|
|MSCI World ex-US||19.1%||4.6%||7.8%|
Horizon pooled returns as of 9/30/2017 Source: Cambridge Associates
While still trailing what is now the 8th year of the public equity bull markets, every private capital strategy across all regions posted solid gains through the third quarter of 2017, with developed ex-US chalking up significant gains so far this year. The caveat to all this, though, is the fact that exit activity slowed down in 2017 compared to previous years. By the end of the third quarter, there was $129 billion in exit value represented by 755 exits. At the end of the year, those numbers were $185 billion and 1,097 respectively, according to Pitchbook. This lengthened the time companies are staying inside fund manager’s portfolios, with 38% of companies now being held for 5 years or longer. (Hopefully, GPs are making the most out of their portfolio monitoring software!) A large part of the challenge is stubbornly high purchase multiples, now at an average of 10.5x EV/EBITDA. This has undoubtedly scared off many strategic acquirers, which has seen its share of PE exit activity drop significantly last year. On the plus side, the recently passed corporate tax cuts along with a still healthy economy should boost corporate cash levels, prodding corporate acquirers to come back to the table. Whether this pushes multiples even higher remains to be seen.
For now, LPs are continuing to up the ante, with many GPs hitting their fundraising targets, some quite easily. Despite healthy IRRs on their performance reports, investors will be keeping a close eye on the rate of distributions from their fund managers, knowing full well you can’t pay pensioners or fund scholarships based on valuation alone.